Songs Unsung, Issues Remain:  As a host of digital media cases settle, questions remain about the state of the law.

By Hillel I. Parness

Napster, MP3.com, RecordTV—these are a few of the New Economy companies that were sued last year by the music, movie and television industries seeking to halt the widespread exchange of  digital music and movies over the Web. For the most part, these industry suits (often brought under the banner of the Recording Industry of America or the Motion Picture Industry of America) were brought in a vacuum of legal precedent dealing with the Internet. Many of these questions go to the heart of whether these and similar companies are operating within the bounds of the law. For example, the Napster case deals with whether peer-to-peer (computer-to-computer) file sharing is fair use of copyrighted works, and whether companies that employ technology that enables such sharing run afoul of copyright law. Resolution of  these issues is critical to the legal and economic viability of new Internet-based companies—many of which offer free access to, or the ability to share music, movies, and television shows, as the backbone of their businesses. 

Are these lawsuits the death-knell of these hugely popular businesses? Lawyers and industry observers expected that before last year’s end there would be a host of court analyzing the use of the Internet to share and transmit digital media.  Instead, with the sharp downturn in the technology markets, the most prominent of these cases have settled or are close to settlement. Defendants have ceased, or have announced plans to cease, operating the businesses that drew the ire of the industry in the first place.  In light of these developments, it is informative to consider a few of the questions that are still in legal limbo, though it seems that as the cases drag on—and the start-ups' money runs short—these suits are resulting in for-pay or licensed, rather than free, services.

Time-Shifting and Space-Shifting

One of the central themes in many of last year’s digital media cases was the use of the Internet to create recordings of digital media for playback at other times or in other forms.  New Economy start-ups—if they can hang on—hope for rulings that their technology, which allow users to copy and share copyrighted works, constitutes fair use (an exception to copyright law). The music and movie industries, on the other hand, are hugely concerned that unimpeded copying of digital technology facilitated by the upstarts will lead to large-scale piracy that they will be unable to combat.

In one of the few rulings resulting from these industry lawsuits, RIAA v. Diamond Multimedia, decided in 1999, tested the federal Audio Home Recording Act as A basis to ban unlicensed copying of music. The RIAA sought to bar the sale of Diamond’s Rio portable MP3 players on the theory that the players violated the 1992 law by allowing users to make unlicensed copies of copyrighted music.  The U.S. Court of Appeals for the Ninth Circuit ruled in Diamond’s favor, finding that under the AHRA neither the Rio nor the personal computer from which the user uploads MP3 files to the Rio qualifies as a “digital audio recording device.”  That's because the Rio can't record, and the legislative history of the AHRA shows an intent to remove computers from the law's definition.

The case leaves open the question of whether the AHRA applies to any stand-alone digital recording device, say, a wireless Rio with a recording function, which would satisfy the “recording” requirement but function completely independently from a personal computer.  On the other hand, the decision seems to foreclose the use of the law to ban the use of a personal computer running software that turns it into the equivalent of a device the AHRA was intended to regulate, a digital music player and recorder.  A hint of things to come concerning the use of this law by industry interests are the suits filed last year by Metallica and Dr. Dre against Napster, in which they alleged that Napster was an "unlawful use of digital audio interface device,” which the AHRA defines as that which facilitates transmissions between digital audio recording devices.  These suits are still pending, although in light of Napster’s settlement with Bertlesmann in the larger industry suit (discussed below), it’s unclear, at best, whether the AHRA issue raised by Dr. Dre and Metallica will reach the courts.

Internet law observers hoped that precedent would emerge from two other cases filed last year against New Economy companies MP3.com and RecordTV. The MP3.com case concerned my.MP3.com, a free service launched early last year  by MP3.com that provided users access to MP3 versions of record albums, so long as the user could show that he or she owned store-bought copies of the CDs in question.  On January 21, 2000, ten music companies sued MP3.com in the U.S. District Court for the Southern District of New York, claiming that MP3.com’s conversion of the compact disks into the MP3 format constituted copyright infringement.  On May 4, the court granted the music companies’ motion for summary judgment, despite MP3.com’s argument that its conversion of the CDs was fair use.  By August MP3.com reached settlements with BMG, Warner Music, EMI, and Sony.  On November 14, the court found MP3.com liable for copyright infringement and awarded the remaining plaintiff, UMG, $53.4 million in statutory damages and attorneys fees.  After the ruling, UMG and MP3.com announced that they, too, had settled: UMG would grant MP3.com a license to make UMG’s recordings available through the my.MP3.com service for an undisclosed sum.  On December 5, MP3.com relaunched the my.MP3.com service as an advertising-sponsored and for-pay service.

The television and movie industry brought a similar case last year against upstart RecordTV. The company, founded in 1999 by a father to record shows for his children, bills itself as a “Virtual Internet VCR.”  It allows users to select TV programs to be digitally recorded for playback over the Web at the user’s leisure.  In June 2000, 12 motion picture and television companies sued RecordTV in the U.S. District Court for the Central District of California for copyright and trademark infringement and unfair competition. RecordTV suspended its service. In August founder David Simon announced that the company was “seeking a ‘common solution’" with the plaintiffs to record TV shows over the Internet. In December, RecordTV announced that Bertelsmann was in talks to acquire its technology.  (The report was denied by Bertelsmann). It's unlikely that RecordTV will have the resources to defend itself in the lawsuit, which is pending. The service remains suspended, and the Web site states that the company is looking for funding.

Because MP3.com and RecordTV abandoned their business models, courts will not be addressing some of the larger issues implicated by these cases:

∑    As new forms of media replace others, can a user convert his or her music, or movie, or  taped TV program, into each new format? Put another way, when one purchases a music CD, does he purchase a license to the music or ownership of the physical media? How does this model translate into the buying and selling of music without physical media, such as MP3 files?

∑    Assuming it's lawful to convert CDs into the MP3 format, or network television shows into RealPlayer format for playback later, can a user HIRE someone else to perform the conversion?

∑    If the answers to the previous questions are yes, could liability for MP3.com and RecordTV have turned upon the factual question of when the copy was made—after the owner of the CD specifically requested that the copy be made (as in the case of RecordTV), or before, in anticipation that such a request would come (as in the case of my.MP3.com)?

∑    Will courts extend to any new technology the 1984 U.S. Supreme Court’s decision in Sony v. Universal Studios (which found that because VCRs have substantial, noninfringing uses they do not run afoul of copyright law)? Or is the ruling so narrow that it cannot be extended even to RecordTV, its Internet functional equivalent?

Fair Use and Peer-to-Peer File Sharing

Napster, Inc., a company that allows users to share music files over the Internet for free, brought fair use issues to the forefront of the national media last year. Several record labels sued Napster in December 1999 in the U.S. District Court for the Northern District of California. Plaintiffs claimed that through its peer-to-peer (computer-to-computer) file sharing system, Napster was liable for contributory copyright infringement, unfair competition, and other violations.  In July 2000 the court granted the record companies’ motion for a preliminary injunction and ordered Napster shut down.  Napster successfully petitioned the Ninth Circuit for a stay of the district court’s order. In October, the Ninth Circuit heard oral arguments on the issues. Napster's arguments were innovative, and the legal community hoped that the court would shed light on the following points:

∑    Are individuals, as Napster argues, allowed to make copies of musical recordings not just for their own use, but to share with their families and friends?

∑    If so, is it reasonable to accept Napster’s argument that “friends” includes anyone one comes in contact with over the Internet – e.g., Napster’s immense user base?

∑    Would such a ruling in Napster's favor completely eviscerate the rights of copyright holders on the Internet?

On October 31, Napster and Bertelsmann—one of the plaintiffs—announced that they had developed a new business model for a secure, membership-based service that will provide Napster community members with file sharing that "preserves the Napster experience," while providing payments to recording artists, songwriters, recording companies, and music publishers. While the lawsuit has not been dismissed, and Napster has not reached agreements with the remaining defendants, it seems likely that this suit, too, could be resolved prior to any ruling.

Less widely known was the litigation against Scour, Inc. That company introduced its Scour Exchange last April  as a software application that allows users to search, download and share all their digital entertainment files. On July 20, members of the RIAA and the MPAA sued Scour in the Southern District of New York alleging contributory and vicarious copyright infringement.  The indsutry claims that Scour  “participated in and facilitated the illegal on-line distribution and copying of motion pictures, sound recordings, and musical compositions that are or will otherwise be available for lawful purchase, rental, or viewing through legitimate channels.”  In October, Scour filed for bankruptcy. In November, Scour shut down the exchange to settle its bankruptcy case.  And on December 20, CenterSpan Communications bought Scour’s assets, announcing that it would relaunch Scour Exchange as part of the company’s "secure and legal digital distribution channel.”

The fact that these two cases will likely vanish without legal rulings leaves open the question of whether file systems allowing the exchange of copyrighted works subject the owner to copyright liability. Also, do these examples the presage the demise of Napster/Scour-type businesses? Industry observers are predicting that decentralized file-sharing systems such as Gnutella (a free program that allows users to share files directly, without sending them through a central location like napster.com) will place computer-to-computer file sharing beyond the reach of the industry and the courts, because of the seeming impracticality of either halting the dissemination of a free computer program, or bringing actions against all the individual users of the program.

Scope and Application of DMCA Safe Harbors

            The Digital Millennium Copyright Act enacted in 1999 to address the effect of the Internet on copyright laws, provides "safe harbor" defenses against copyright infringement for Internet service providers (such as America Online). But whether these safe harbors apply to New Economy companies is anything but certain, beginning with the question of whether the definition of "service providers" even covers these companies.

The law defines service providers essentially as companies that transmit or allow transmissions over the Internet, at the direction of users, without modifying content. In Napster the court, though wary, accepted Napster’s premise that it was a service provider because the plaintiffs did not dispute it.  However, the district court rejected the argument that Napster qualified for protection under the “transitory digital network communications” safe harbor because it did not qualify as a “system or network controlled or operated by or for the service provider.”  On appeal Napster tried again, arguing for protection under a different safe harbor for “information location tools,” which protects service providers that provide tools to users to find things on the internet, but neither Napster nor the RIAA even addressed whether Napster qualifies as a “service provider” under the DMCA.

The DMCA comes into play in yet another business model built around MP3 technology—MP3Board—which, in turn, has spawned more litigation. MP3Board is a Web site that provides users with search engines to locate MP3 files on the Internet and with hypertext links to offsite MP3 files.  the site caught the attention of the industry, which took the position that because MP3Board connects users to allegedly infringing digital music files, it facilitates copyright infringement, and is liable as a contributory or vicarious infringer.  On June 2, in response to cease-and-desist letters from the RIAA, MP3Board filed a declaratory judgment action in the Northern District of California.  On June 23, the record companies sued MP3Board in the Southern District of New York.  The California suit was dismissed and the case consolidated with the action pending in New York. News stories have suggested that MP3Board has been seeking to make a significant acquisition—including, at one point, an acquisition of Scour —to restructure its services.  The Web site remains active, and trial is scheduled for later this year.

In its California complaint and answer to the New York complaint MP3Board argued  that it is protected from liability, in part, by four of the DMCA’s safe harbors, including the two touched upon in the Napster case. Until there is further activity in these cases, these questions remain:

∑    Does the definition of “service provider” under the DMCA provide protection to all companies that facilitate communications or connections between Internet users, or only the traditional ISPs?

∑    Even if they fit within the definition of “service provider,” do the safe harbors protect anything other than traditional ISPs? Was the Napster district court correct in its determination that Napster did not qualify as a “system or network controlled or operated by or for the service provider”?

Where things go from here is anyone's guess. But start-ups begin year 2001 with many of the same questions they faced in 1999 and 2000 about the transmission of digital media over the Internet. Fledgling businesses do know, however, that any new attempts to transmit digital files, except those with the express blessing of the industry, will be met by legal challenge. In this current climate, it's possible that these questions will go unresolved for some time—and new legal questions will arise with the next generation of technology.

 

Hillel I. Parness ([email protected]) focuses on intellectual property and Internet litigation in New York.